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Tax Highlights Awards: Biggest Tax Fiasco of the Year

Reflecting on a busy year for international tax developments, we look back at some of the more notable cases in our inaugural Tax Highlights
of the Year Awards, and over the next few weeks present the case for winners of the following categories:

Biggest
tax fiasco of the year;

Best cake
case of the year;

Best
supporting food case of the year; and

Naughtiest
tax litigant of the year.

Biggest Tax Fiasco of
the Year

This came even before 2014 kicked off – the government of
Panama’s announcement on New Year’s Eve that it was reversing an unheralded but
revolutionary change in the country’s tax legislation that had been signed into
law just one day before.

For a century, it has been the core principle of the
Panamanian tax system that it taxes only Panama source income, irrespective of
residence status. Naturally, this has made it an attractive residence for
businesses (over 300,000 corporations are based in Panama) – until, that is,
late on December 28, 2013 when, without any prior notice let alone consultation,
the National Assembly passed legislation, approved by President Ricardo
Martinelli on December 30, imposing taxation on worldwide income with effect
from December 31. Since the normal Panamanian tax year is the calendar year,
this meant that worldwide taxation would have applied even to income in the
2013 tax year.

Businesses, many of which have moved to Panama precisely
because of its territorial system of taxation, were appalled. “As an organization that represents the
largest representatives of the Panama stock market,” said the country’s Chamber
of Securities, “we should have been consulted on this modification.” Others
were less restrained. A “law like this”, blogged one businessman, “would
utterly cripple the Panama economy! Taxing shipping companies, logistics
companies, foreign companies that do business in Panama and all other smaller
companies and residents who choose to do business here because of its tax
friendly policies would cause a mass exodus. These companies would close, move
their money out of the country and leave thousands without jobs.”

Almost immediately, the government began to backtrack, but
at first without running up the white flag. “On territoriality and taxes”,
tweeted President Martinelli on the morning of New Year’s Eve, “if we need to
repeal, we’ll repeal, or what needs to be defined will be defined.” Nevertheless,
he added, “ample debate must take place” – though none, apparently, had been
thought necessary before the change had been made in the first place, slipped
in as last-minute amendment to a bill originally dealing only with a single
economic zone in a single district of a single province.

Within a couple of hours, the disciplined retreat signalled
by the President turned into a headlong flight when the head of Panama’s tax
authority, Luis Cucalón, tweeted a remarkable mea culpa. “I was the one who proposed
[the new law] and I made a mistake. We are not prepared for taxation of
worldwide income. I have requested Mr President to repeal [the new law], which
he accepted.”

By January 10, it was all over. The worldwide income rule
was consigned to the legislative dustbin, with the repeal legislation given retrospective
effect from December 30. So not only was the new rule repealed, it was as if it
had never existed at all.

As for the contrite Snr Cucalón,
he was asked by the President to be “more cautious” in future.

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